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Tech stocks defy market logic

A slew of high-tech companies have been singing the blues, but some Wall Street analysts are seeing beyond the downturn and giving their stocks a "thumbs up."

A slew of high-tech companies have suffered earnings warnings and steep shortfalls of late, but some Wall Street analysts are seeing beyond the downturn and remain bullish on their stocks.

This uncharacteristic optimism has helped prop up stocks like 3Com (COMS), Silicon Graphics (SGI), Adobe Systems (ADBE), and Compaq (CPQ), which otherwise might have tumbled.

"The Dow is at 8,700, going on 9,000--this is a very exuberant environment, and that can buoy the downside," said Lou Mazzucchelli, an analyst at Gerard Klauer Mattison, noting that a bull market often pulls sluggish stocks along with it.

Ironically, he added, bad news can actually be good on the market. "Sometimes companies get put in the penalty box," he said--and, after their stocks get beaten down by warnings, investors often see a good buying opportunity.

Adobe and 3Com last week reported results that missed analysts' expectations, and Silicon Graphics warned Friday that its results would not be up to par either. Scores of analysts downgraded these securities on the news, but a handful bucked the trend and raised them instead.

Adobe reported Thursday that net income missed expectations by 10 cents a share. The software maker reported income of $22.9 million, or 33 cents per share, excluding nonrecurring items, such as investment gains and special charges. Wall Street had expected Adobe to earn 44 cents per share, according to First Call.

Not to worry. BT Alex. Brown analyst Mary McCaffrey raised his rating on Adobe on Friday, to "buy" from "market perform."

While results fell below expectations, Adobe's first quarter could represent a turning point, she said in a note to investors. "The key issue for this quarter is the shipment of one key product, which we believe to be PhotoShop," McCaffrey said. "While this is very hard to call, we are assuming that some new upgrade sales are included in the current quarter."

It was a tempered optimism, however: "This could easily slip a few weeks into the August quarter," she added, therefore missing the bump expected in the current quarter.

McCaffrey also set a target price for Adobe shares of $58 by the end of the year. The company's stock fell 8 percent in early trading Friday, to 44-1/4, but bounced back later, to 45-1/2.

Early last week, 3Com posted profits 10 cents shy of analysts' expectations--another unwelcome surprise. The networking giant posted earnings of $13.9 million, or 4 cents per share, while Wall Street had expected 14 cents per share. That compares with earnings of $179.1 million, or 54 cents per share, for the like quarter a year ago. On the bright side, the company did offer some reassurance that its channel inventory problems are under control.

The very next day, Adams Harkness & Hill increased its rating on 3Com to "attractive" from "market performer."

3Com stock is now trading higher than it was a week ago, prior to the disappointing earnings report. On Friday it was up 10 percent from where it was trading a week before, at 36-3/8. It ended that week at 33-3/16.

In another instance, Silicon Graphics--supposedly in the midst of a turnaround under newly installed CEO Rich "The Rocket" Belluzzo--said Friday that the company's earnings and revenue for the quarter ending March 30 would be "significantly below" expectations.

SGI said it expects a "significant loss" based on expected revenue of about $700 million, while analysts had been expecting a break-even quarter. A year ago, SGI posted revenue of $909.4 million and profits of $105 million, or 6 cents a share. The company cited declines in the Unix workstation and supercomputer markets, as well as marketing execution challenges in its server business, for the weak results.

But despite the earnings upset, SGI lost just 3/16, to 13-15/16. Goldman Sachs cut its earnings estimates for the stock, but still rated it a "market perform."

Stocks that were beaten down from softer-than-expected earnings earlier this month also have regained much of their losses.

Compaq, for instance, warning of weak earnings earlier this month but, during the past week, saw its stock jump about 14 percent.

The stock has not quite rebounded to where it was before the company's March 6 announcement, but on Friday it was just 1 point shy of the closing price that was recorded a day earlier, when it closed at 27-5/8. Last Thursday it closed at 26-5/8.

After being downgraded by a round of investment firms, a handful saw light at the end of the tunnel and upgraded Compaq shares. The stock was upgraded by Donaldson, Lufkin & Jenrette, and PaineWebber analyst Walter Winnitzki reiterated his "buy" rating.

"While management cited slower sell-through and more competitive pricing as reasons for the shortfall, our sources indicate that end-user demand for Compaq products, and the industry in general, remains healthy," Winnitzki said in a research report. "We think this temporary setback will leave Compaq much better positioned to compete, and should eliminate the cloud that has hung over the shares since last fall."

Channel inventory should decrease three to four weeks by June, Winnitzki said, applauding management's decision to take action now that would improve Compaq's future results.

Motorola (MOT) warned that its first-quarter results are expected to be "well below" Wall Street's expectations, blaming weakened Asian currencies.

Before the warning, the stock was at 55-7/8, but it dropped to 52 afterward. On Friday, it rebounded to 57-1/2.

The amount the stock drops and how long it takes to recover depends on how much of a margin the company misses expectations by, how big the prior run-up is, and what sector the stock is in, Mazzucchelli said.

Other tech companies, for example, like Netscape Communications (NSCP) and Oracle (ORCL), didn't bode as well after they announced they would not meet expectations.

Oracle's stock plunged after the company's second-quarter earnings last December fell short of Wall Street's expectations.

The database software maker's stock fell to as low as 17-3/4, down from 32-3/8 prior to the report. It has yet to completely recover. The stock ended down Friday at 31-1/16, off 7/16.

Software companies are seen as more volatile than hardware companies, said Mazzucchelli. "That environment is seen as continuing to be hostile, and people are concerned about an overall saturation in the database market," he noted.

Having announced a wider-than-expected quarterly loss, its first round of job cuts, and continued competition from Microsoft, Netscape saw its stock sink into the mid-teens earlier this year. It closed at 19-1/8 Friday, off from its 52-week high of 49-1/2.

"Microsoft is a major obstacle to Netscape," Mazzucchelli said, and that will continue to put pressure on the stock.